On Feb 19, 2014, we issued an updated research report on D.R. Horton Inc (DHI). On Jan 28, the homebuilder reported better-than-expected first-quarter fiscal 2014 surpassing the Zacks Consensus Estimate for both revenues and earnings due to improved market conditions. In fact, the first-quarter results rebounded from a weak fourth quarter of 2013.
Earnings soared 80% year over year driven by homebuilding revenue growth of 33% and strong margins. Order trends improved slightly after a slower second half of 2013 due to better housing market conditions across most markets. Moreover, weekly sales pace has accelerated in Jan 2014 which keeps D.R. Horton optimistic for the upcoming peak spring selling season. Management believes that it is well placed to capitalize on the increased demand during the season with its strong balance sheet, a strong supply of finished lots and homes in inventory and a higher community count.
Estimates for this Zacks Rank #1 (Strong Buy) stock were largely revised upwards after the announcement of strong fourth-quarter results. The Zacks Consensus Estimate for fiscal 2014 increased 6.5% and that for 2015 grew 4.7% over the last 30 days.
Most importantly, D.R. Horton’s strong land position positioned allows it to meet demand in fiscal 2014 and 2015. Also, Management is also consistently reducing both construction and overhead expenses. The company’s profitability has remained intact due to its cost control and productivity improvement efforts. Its pre-tax margins have almost doubled from 5.6% in 2012 to 10.5% in fiscal 2013.
However, despite posting strong profits regularly, we would like to see a substantial rebound in volumes. The company’s sales volume growth has moderated since the second half of fiscal 2013. Net order trend in the past 2-3 quarters have been weaker than the significant growth seen in the first half of 2013. The recent increase in interest/mortgage rates and increasing home prices has slowed order pace and traffic.
Moreover, recent increases in mortgage rates and lack of overall economic recovery could hurt demand for new homes.
Stocks That Warrant a Look/Key Picks from the Sector
Other stocks worth considering within this sector include Taylor Morrison Home Corporation (TMHC), MRV Engenharia e Participa (MRVNY) and Lennar Corporation (LEN). While Taylor Morrison and MRV Engenharia enjoy a Zacks Rank #1, Lennar carries a Zacks Rank #2 (Buy).